Mayora Indah, Buoyant revenues but higher opex too

Mayora reported that sales continued to grow strongly in October. For the full year, we still expect 19% top line growth. At the bottom line, however, we cut our FY18 earnings estimate by 10.5% given increasing opex. With limited upside and expensive valuation, we maintain our HOLD recommendation.

Strong sales were offset by higher opex. In a recent meeting with the company we learnt that MYOR’s October sales reached IDR2.4tn, or 10% higher than the average monthly sales in 3Q18. Domestic sales and exports were both buoyant. Given the solid performance in October coming after a strong 9M18, we revise up our FY18F revenues estimate by 4.8%. To alleviate cost pressures, the company took further efficiency measures in both production and raw materials procurement.

Combined with soft commodity prices (including oil) and the stable rupiah, we expect the company to maintain its high gross margin in FY18F at 25.9%. Nonetheless, with increasing competition in both the export and domestic markets and with further efforts to push new products, MYOR estimates higher selling expenses this year. Hence, with lower operating profits, we revise down our FY18F earnings estimate by 10.5%. As we believe that there might be some upside from higher-than expected-FY18F sales, if the company could record higher revenues growth this year of 25% (vs our current forecast of 19%) this would result in 3.6% yoy FY18F earnings growth (vs -2% yoy growth in our current forecast) – ceteris paribus.

FY19F earnings growth expected to reach 9.3% yoy. In 2019, we expect the company to book 15.8% yoy top line growth, with both the food and beverages divisions growing accordingly. Supported by soft commodity prices and the stable rupiah, we expect the FY19 gross margin to be maintained at 25.2%. After recording higher opex in 2018 to push sales, we believe the company will tone down its opex in 2019. This should lift the FY19F operating margin to 10.1%. Bear in mind that the gearing ratio has increased (9M18: 90%) since the company needed financing to develop three new plants (for coffee, biscuits and wafers). In turn, this has translated into higher interest expenses. For FY19F, we expect earnings to grow 9.3% yoy to IDR1.7tn.

Maintain HOLD. This year, the company has launched new products/SKU (Exhibit 10) in a bid to counter the stiffer competition and to meet the growing consumer appetite for new products. This helped to sustain sales growth in 2018. Going into 2019, we believe that increasing consumption ahead of the presidential election should benefit Mayora. We roll over our valuation to 2019 and arrive at a new TP of IDR2,730 implying FY19F PE of 33.6x based on DCF valuation (WACC 8.7%, Terminal Growth 4%).